Context : A bright X-ray transient was seen during an XMM-Newton observation in the direction of the Small Magellanic Cloud ( SMC ) in October 2006 .

Aims : The EPIC data allow us to accurately locate the source and to investigate its temporal and spectral behaviour .

Methods : X-ray spectra covering 0.2 - 10 keV and pulse profiles in different energy bands were extracted from the EPIC data .

Results : The detection of 6.85 s pulsations in the EPIC-PN data unambiguously identifies the transient with XTE J0103-728 , discovered as 6.85 s pulsar by RXTE .
The X-ray light curve during the XMM-Newton observation shows flaring activity of the source with intensity changes by a factor of two within 10 minutes .
Modelling of pulse-phase averaged spectra with a simple absorbed power-law indicates systematic residuals which can be accounted for by a second emission component .
For models implying blackbody emission , thermal plasma emission or emission from the accretion disk ( disk-blackbody ) , the latter yields physically sensible parameters .
The photon index of the power-law of \sim 0.4 indicates a relatively hard spectrum .
The 0.2 - 10 keV luminosity was 2 \times 10 ^ { 37 } erg s ^ { -1 } with a contribution of \sim 3 % from the disk-blackbody component .
A likely origin for the excess emission is reprocessing of hard X-rays from the neutron star by optically thick material near the inner edge of an accretion disk .
From a timing analysis we determine the pulse period to 6.85401 ( 1 ) s indicating an average spin-down of \sim 0.0017 s per year since the discovery of XTE J0103-728 in May 2003 .

Conclusions : The X-ray properties and the identification with a Be star confirm XTE J0103-728 as Be/X-ray binary transient in the SMC .